2018 CAP Suppliers Report: How to help contract workers save for retirement

Brooke Smith | December 21, 2018

As the traditional workforce evolves and the era of the 25-year career with a single company comes to an end, the contract employee is likely here to stay.

While it’s a worldwide phenomenon, gig workers now comprise a good portion of Canada’s working population. Some 2.2 million Canadians were categorized as temporary employees in September 2017, according to Statistics Canada. And organizations are happy to hire them.

One reason is employers don’t have to go through the typical administrative hurdles in providing pension and benefits programs, says Joe De Dominicis, vice-president and retirement practice leader for Ontario at Morneau Shepell Ltd.

But where contract workers don’t have access to the pension and benefits plans of a full-time employee, De Dominicis says employers can pay them more in lieu. “The expectation is that those employees will take that extra money and prudently invest or use it to purchase the insurance they need,” he says.

But that’s just the problem. How do employers encourage gig workers to invest that extra compensation in their retirements? And where employers don’t adjust compensation, how can they help these employees prepare for their future?

Are gig workers saving for retirement?

16% of independent workers have a retirement savings plan compared to 52% of full-time employees, according to a 2017 survey by Prudential.

49% of those over age 55 are saving for retirement through their gig job.

31% of gig workers associate retirement with anxiety.

70% of full-time gig workers feel they won’t be able to maintain their current lifestyle in retirement.

Source: A 2018 Betterment report on the gig economy and the future of retirement

Helping hand

The gig economy may be a relatively new term, but contract workers have been around for a while. Two significant developments have prompted plan sponsors to begin considering retirement savings options for these employees, according to Jillian Kennedy, partner and Canadian head of defined contribution and financial wellness at Mercer.

The first is Quebec’s voluntary retirement savings plan, launched in 2014. Employers in the province with 20 or more employees were required to set up a VRSP or an equivalent group plan by Jan. 1, 2017, while employers with 10 to 19 workers had until the end of that year.

Many companies with staff in Quebec also had workforces in other provinces, and they wanted to treat all employees equally when it came to benefits. “That’s really where everyone started to say, ‘Why wouldn’t we let any employee who wanted to save participate on a voluntary basis in one of our savings arrangements?’” says Kennedy.

The second development is the evolving talent environment. “The casual employee — who in the past we might have thought of as somebody simply looking for short-term work — is actually a very skilled and talented role that you need in your organization, just as much as the rest of your employees,” says Kennedy. Employers are looking for ways to attract this skilled talent, she adds, and one way is allowing them to join a company’s retirement savings plan.

Among employers offering this option, it’s typically only the voluntary component of the plan, says Zaheed Jiwani, a principal at Eckler Ltd. For example, where employers match full-time employee contributions in their defined contribution or registered retirement savings plan, they may open it up to contract workers but without the company match, he notes.

However, a newer trend in offering retirement savings options to gig workers includes the company match. “It’s being driven by how important this talent is to filling a gap in the organization,” says Kennedy. “The more important they are, the more there’s the willingness to offer benefits.”

Larger organizations using contract employees may allow them to participate in the savings plans because they expect them to return in the future for additional projects, says De Dominicis. He notes there will often be a threshold, such as a certain number of hours spent working at a company, before contract workers can join the plan.

Along with the opportunity to save for retirement, these employees “get the benefit of the governance, the oversight, the institutional investment managers and, most importantly, the fees,” says Jiwani.

As well, employees can take advantage of the educational sessions, seminars and tools offered by employers. “The benefit to [the contract employee] is, ‘I get really low investment costs. I attend those education sessions that everybody else does. I get to use all the tools. I get to invest in the same funds and I feel like I’m part of a community of employees here when it comes to savings,’” says Kennedy.

Lyft has done just that. In 2015, the car-driving service partnered with Honest Dollar, a U.S.-based investing platform that caters to independent contractors, to provide its drivers in the U.S. with a savings and retirement planning option. “Through the partnership, Lyft drivers receive exclusive plan discounts, access to mobile investing and ongoing financial education to inform their investments,” according to a Lyft spokesperson.

Autonomy and job satisfaction

Matthew Corritore, assistant professor of strategy and organization at McGill University’s Desautels Faculty of Management, focuses his research on job satisfaction, looking at occupations or industries where contract workers may be more or less happy or satisfied with their jobs relative to full-time workers.

His preliminary results show that when contract workers discuss the benefits they receive in employment, they provide lower ratings than permanent employees. However, in some instances, Corritore says contract work can provide a number of advantages that may partially offset the negatives of being temporary, such as autonomy of work.

Still, Corritore is worried about non-standard work arrangements and the extent to which they often don’t provide the same level of security as regular employment. “They don’t provide the same benefits or the same opportunities, like investing for retirement.”

The challenges

While a number of employers are either offering their contract workers access to retirement savings programs, or at least considering it, some question the risks, especially compared to providing the option to the rest of the workforce.

“There’s a known entity of full-time permanent people,” says Kennedy. “We know their service and how much money they save. There’s a predictability to the governance we apply to those assets.”

In other words, adding in voluntary money from the contract workers may prove a challenge for pension committees. “We’ve got new plans and more money coming in, but we don’t understand the behaviour of these voluntary savers,” says Kennedy.

The other challenge is alignment with payroll, she adds. “If you’ve got 1,000 people representing your temporary workforce, and they turn over every six months, that’s a lot of payroll work to get them set up and get their deductions happening.”

But Jiwani says there’s a simple solution to this administrative issue. “You want to offer programs that will expire when the employee leaves the organization,” he says, pointing to the RRSP or tax-free savings account. “When [these contract employees] leave, they can either take their money and transfer it into another vehicle . . . or transfer it into the plan administrator’s global offering that’s not plan sponsor-specific.”

In Numbers

9.5% of Canadians aged 18 or older participated in the sharing economy between November 2015 and October 2016, according to Statistics Canada.

Up to 162 million
people in the U.S. and
Europe engage in some form of independent or contract work, according to a 2016 survey by the McKinsey Global Institute.

85% of Canadian employers foresee an increasing move to an agile workforce in the next few years, according to a 2018 survey by BMO Wealth Management. It found the top four reasons Canadians have embraced the gig economy are autonomy and control (49%), making extra money on the side (49%), balancing career and family needs (42%) and because it was the only way to make an income (27%).

The benefits

As well, while many members of the gig economy will always remain in contract postions, some may become full-time employees, says Jiwani. “From an overall employer value proposition, the [contract] employee is now being treated like a full-time employee, except they might not be getting the match. But they’re now already familiar with the programs you offer your full-time employees.”

With that move to a full-time position, the employer match can kick in automatically, he adds. “You don’t have to wait for the behavioural nudge. You don’t have to wait for the member to do something. We know inertia is so high in these plans.”

Another benefit of including contract employees in a workplace retirement savings program is the additional assets in the plan, which can help with the overall purchasing power for all employees, says Jiwani. “It’s not just beneficial to contract employees, it’s also beneficial to full-time employees.”

Nicole Mardis, a PhD candidate at McGill University, has spent the majority of her career in contract work in government and academia. She says this hasn’t translated into a lack of employee benefits or below average benefits, but she has noticed that differences exist across industries and organizations, in terms of which workers have access to benefits, as well as the terms and conditions.

Mardis wonders if the trend toward more contingent and more granular forms of work will have a bearing on income insecurity, saving patterns and inequality. “Since many employers and employees appreciate the flexibility of contract work, I encourage employers to think about how they could adjust benefits programs to ensure flexibility is not pitted against coverage or access,” she says.